By Masha Zager
The wireless data explosion is the biggest telecom story of recent years. The numbers are staggering: Cisco estimates that in 2010, mobile data traffic was triple the volume of the entire global Internet in 2000. AT&T says its mobile data traffic increased more than 8,000% over the past four years.
The main driver for this data flood is the smartphone. Forty-three percent of U.S. mobile phone subscribers now have smartphones, according to research firm Nielsen. Consumers use these phones to take more than a quarter of their photos (according to research firm NPD)—and also to send email, play Internet music and video, check traffic reports and occasionally even phone home. But smartphones aren’t the whole picture. Consumers are also downloading e-books to their e-readers and using mobile broadband to access the Internet from their laptops. Increasingly, machines are even talking directly to one another. For example, many smart meters use cellular networks to report readings to electric utilities.
Eventually, nearly all of this data finds its way to the wired network. (An old adage defines a wireless signal as one that’s still searching for a wired node.) Until recently, most wireless traffic has been transported, or backhauled, from cell towers to core networks over copper wires using T-1 technology. In most cases, the service is provided by incumbent local exchange carriers (ILECs). Thus, even when telephone companies lose landline customers to cellular service, they earn revenue by backhauling those same customers’ cellphone data. It’s just that they’re wholesaling the service to wireless carriers rather than selling it directly to customers.
Because T-1 service is priced high, many telcos have found mobile backhaul to be a lucrative, fast-growing source of revenue. Andrew Freeman, solutions marketing director at equipment vendor Calix, estimates that T-1 lines to cell towers are leased for between $200 and $500 per month in urban areas, and higher in some rural areas. In areas with heavy smartphone use, wireless carriers have added more and more lines; eight T-1 lines per carrier on a tower is now standard, Freeman said. New towers have also been built. There are now nearly half a million cell towers in the United States.
All this adds up to substantial amounts of money. For 2010, analyst firm Yankee Group valued the North American market for wholesale backhaul services at $2.45 billion.
Even though wireless data traffic is likely to keep growing exponentially, telcos’ backhaul revenues will not follow the same dizzying upward path. Wireless carriers are relying on two methods to contain their backhaul costs (or three methods, if you include bandwidth caps): competition and technology upgrades.
In the last few years, competitive providers have entered the backhaul market in droves. Cable companies, competitive local exchange carriers (CLECs), and middlemile and long-haul network operators are all vying for a share of the market. Most of these competitors are focusing their efforts in and near metropolitan areas, where they already have fiber. However, some, such as Level 3, have explicit rural strategies. Level 3, which has significant long-haul fiber routes, is pursuing what has been called a “tower to the fiber” approach, working with tower operators to place carrierneutral towers on or near its rural network facilities. Users of these towers are required to purchase transport services from Level 3.
In addition to encouraging competition for backhaul, wireless carriers also have embarked on long-term programs to transition their backhaul technology from T-1 service to less-expensive Ethernet service. In fact, the two initiatives are closely related. Wireless carriers have been publishing their specifications for Ethernet transport service and inviting any network operator to bid.
Research firm NPD In-Stat projects that by 2014 Ethernet will be the dominant technology for wireless backhaul, with 85% usage in base stations. “The end goal is to decommission the T-1s and run an exclusively Ether net network, but it may take some time to get there,” Freeman explained. “We still sell a lot of T-1 devices even today, but the momentum is all on the Ethernet side.” According to Freeman, carriers typically request 50 Mbps Ethernet circuits— the equivalent of about 32 T-1 lines—at most cell sites and 100 Mbps circuits in some urban areas.
In general, the carriers are implementing Ethernet services over fiber. Though Ethernet-over-copper technology is available from several vendors (as is T-1-over-fiber technology), Freeman said that, for purposes of both reliability and future-proofing, “AT&T and Verizon are both very clear that they will only accept fiber to cell towers.”
Even in the unlikely situation that a wireless carrier can’t find a provider to build fiber, it holds a trump card because it can easily install its own microwave links at cell towers. Microwave is cheaper, more scalable and more reliable than copper, though not as desirable as fiber. Freeman said, “If rural telcos think they can get away with not upgrading from copper, they will just lose [the tower] to microwave.”
Large wireless carriers started their conversion as early as 2006 in the largest metropolitan areas, where cellular network traffic is highest, and progressed to smaller metropolitan areas, suburbs and finally to rural areas, following the same order in which they built and upgraded their cellular networks. Many rural telcos are now in the midst of converting their backhaul services to Ethernet over fiber, and those that aren’t should expect to see requests for bids soon.
Kevin Larson, general manager of Consolidated Telecommunications Co. (CTC; Brainerd, Minn.), said his company provides backhaul services to all four major wireless carriers—Verizon, AT&T, Sprint and T-Mobile—in both its ILEC and CLEC territories. Over the last several years, as it introduced third-generation wireless data plans, all these carriers increased their T-1 service from one or two lines per tower to as many as 15.
Recently, the carriers began asking for bids to install fiber to the towers, and CTC has bid “aggressively,” both inside and outside its service territory, Larson said. When carriers’ requests for proposals cover large geographic areas, as they often do, CTC bids as part of a consortium of independent telcos. CTC has been a successful bidder and has even been given financial assistance for construction in CLEC areas. “That’s unusual,” Larson admitted. “A lot of [the carriers] had service with a national incumbent, but the cost for the incumbent to bring fiber there was prohibitive. We were able to do it at a reduced cost, so [the wireless carrier] paid us to bring fiber to a number of towers in our CLEC area.”
Within its own ILEC territory, CTC brings fiber to cell sites without financial assistance. The company is already undertaking a complete fiber-to-the-home buildout, so the additional costs of extending fiber to the cell sites are not unreasonably high. In fact, in some areas where CTC is building fiber to the home, Larson has made proactive efforts to bring fiber to additional towers that weren’t covered in a request for proposal (RFP). He said carriers have been pleased by CTC’s willingness to “go the extra mile” for them and by the company’s efficiency and customer service.
Now that fiber is going in, Larson expects to begin seeing requests to convert from T-1 to Ethernet connections within the next year. He said, “Ethernet is a more efficient network, it’s a lesser cost than all those T-1s and they can go to fourth-generation services. They all have roadmaps to reach LTE [long-term evolution, the predominant fourth-generation wireless technology]. LTE provides for much more data, so the pipe needs to be bigger.”
The Million-Dollar Question
That raises what Larson calls the “million-dollar question”: If data traffic increases but T-1 service is replaced by less expensive Ethernet service, what is the net effect on backhaul revenue? In the short term, Larson believes revenue for towers converted to Ethernet may decline, especially in areas where he was forced to price competitively. He hopes that, in time, the continued growth in wireless traffic will make up for some of those short-term declines.
Jonathan West, general manager of Twin Lakes Telephone Cooperative Corp. (Gainesboro, Tenn.), told a similar story. Verizon and U.S. Cellular are the major wireless carriers in Twin Lakes’ footprint, and AT&T, T-Mobile and Sprint each have a small presence. Over the last few years, all carriers have added T-1 lines, and AT&T has added some sites. Today, they are all converting to Ethernet as quickly as possible, with Verizon at the head of the pack.
“They’re typically requesting 50 Mbps service over fiber,” he said, explaining that because 50 Mbps can’t be “reliably delivered over copper with any traditional solutions. … That almost necessitates fiber as the only reliable method. They’re forcing it without actually forcing it.”
However, like CTC, Twin Lakes doesn’t really have to be forced to build fiber to cell sites. West views this project as part of the company’s overall buildout of fiber throughout its service area, which has been ongoing for nearly five years. “We’re trying to get fiber to as many places as we can,” he said. “Cell sites are the natural beneficiary.” Twin Lakes also has built fiber into CLEC areas, and West is now actively pursuing backhaul contracts in some of those areas, though the company did not previously serve cell towers there.
West said the conversion to Ethernet has been slightly revenue positive overall, though it varies from tower to tower depending on how many T-1 lines are being replaced. He does not anticipate any significant growth in the future. “Ethernet price points generally decrease over time; the price will mirror the increase in bandwidth demand,” he said.
Still, West said, even if backhaul revenue is no longer growing, “it is a good, solid source of revenue, and the good news is that we’re not seeing a decline.” At Palmetto Rural Telephone Cooperative (Walterboro, S.C.), Chief Technology Officer Tony Stout is working with two wireless carriers to convert cell towers to fiber and Ethernet, and is bidding on a third contract. “The starting point is 100 Mbps, and I’m hearing that next year there will be 200 Mbps at many of the sites,” he said. “All three of the carriers plan to be fully IP-enabled; all their sites will support packet transport by the end of 2012. I’m assuming that if they’re not rolling out fourth-generation wireless in conjunction with the tower conversion, it will be very soon.”
Like CTC, Palmetto responds to carriers’ RFPs as part of a consortium. In this case, the consortium is organized by Spirit Communications, a statewide network owned by a group of independent telcos, including Palmetto. Collectively, these telcos serve the entire state outside a few metropolitan areas. Spirit Communications handles negotiations with wireless carriers, signs the master contract, and takes responsibility for order management, process management and service-level management. Palmetto and the other telcos each bid on cell towers in and near their own territories and perform the last-mile installation and support for those towers.
Stout described his company’s decision to spend more than $1 million building fiber to cell towers in order to offer a lower-priced service with extremely demanding service levels as “a strategic long-term decision.” To amortize the investment, Palmetto pushed for longer contracts than the RFPs originally called for and ended by signing seven-year contracts. “The ROI [return on investment] model works at seven years,” Stout explained. An added benefit is that prices are now locked in for seven years, insulating the company from expected declines in Ethernet pricing. “In years 5, 6 and 7, we’ll be real happy with the price,” Stout said.
In addition, in some of the CLEC areas, Stout said, “We now have a fiber footprint we can leverage for fiber to the home.” He summed up the company’s situation, saying, “If we can be the first carrier to each tower, there’s a pretty good chance someone won’t overbuild us. If we didn’t build it, the cable company might, or some overbuilder. … At the end of the day, everyone is doing it. We’re losing access lines, and we have to find new revenue streams. Backhaul is a key component in that.”
Masha Zager is a freelance writer. She can be reached at email@example.com.